This proposed dissertation will investigate methods to construct unbiased measures of hospital quality and then use these measures to evaluate how hospital quality affects hospital-insurer bargaining outcomes in the context of pricing for intensive cardiac procedures. First, the proposed dissertation will undertake to construct unbiased measures of hospital quality. Previous investigators have noted that conventional estimates of hospital quality derived from administrative data may be biased due to unobserved severity of illness. Because of the prohibitive cost involved in collecting more detailed clinical data, investigators have retained an interest in using administrative data for monitoring hospital quality. Recently, investigators have proposed using the method of instrumental variables-using linear distance as an instrument-to account for unobserved severity of illness. The proposed dissertation will generate simulated data, in which the correlations between variables are known with certainty and can be experimentally altered, to identify the conditions under which the method of instrumental variables can produce unbiased estimates of hospital quality. Second, the proposed dissertation will undertake to determine whether a hospital's quality exerts a positive effect on its bargaining power relative to the insurer. To accomplish this, the proposed dissertation uses a generalized bargaining model that explicitly accounts for the external opportunities available to both parties. The analysis will focus on negotiated prices for coronary artery bypass graft surgery and percutaneous transluminal coronary angioplasty. These intensive cardiac procedures were selected because they are expensive procedures that are frequently carved out in pricing negotiations between hospitals and insurers and because they are characterized by relatively frequent in-hospital mortality. In addition to hospital quality, other determinants of relative bargaining power will be investigated (such as system affiliation, market concentration, and area HMO penetration). The core analytic data file for this dissertation will be drawn from the inpatient component of the MEDSTAT MarketScan Commercial Claims and Encounters Database. Other data sources to be used include: the Medicare Provider Analysis and Review file; the Healthcare Cost and Utilization Project State Inpatient Databases; the American Hospital Association Annual Survey; and the Area Resource File.